In line with market and our expectations, the RBI’s MPC reduced its benchmark repo rate by 25 bps to 5.75% (lowest since September 2010) at the second bi-monthly policy review for FY20 on Friday. As such, the reverse repo rate and the MSF rate now stand adjusted at 5.50% and 6%, respectively. All six MPC members voted unanimously for the rate cut and along with a shift in stance to ‘accommodative’ from ‘neutral’.

Since the sizeable downward revisions to the inflation trajectory in the last two policy reviews in February 2019 and April 2019, CPI inflation has broadly moved on expected lines. Hence, the average CPI inflation forecast for FY20 was retained at 3.3% by the RBI.

Softness in Q4FY19 GDP data coupled with subdued early signals from some of the activity indicators in Q1FY20 prompted the RBI to revise its FY20 GDP growth forecast lower to 7% from 7.2% earlier. Weakness in global demand and uncertainty on trade prospects also seems to have weighed upon the decision.

There are three critical takeaways from RBI’s forecast revisions. First, since its first policy decision in October 16, this is only other time that the entire MPC voted unanimously for a rate cut. Second, the monetary policy stance is back to ‘accommodative’ for the first time since December 2016, thereby, effectively ruling out the possibility of a rate hike in the near to medium term. And lastly, the RBI continues to forecast inflation trajectory at sub-4% levels with FY20 average inflation expected at 3.3%, the lowest since FY91. The raison d’etre for the shift in RBI stance to ‘accomodative’ appears to be driven by a buildup of growth concerns since the last policy review, which now unambiguously points towards the opening up of a negative output gap in the economy.

With growth conditions likely to remain lacklustre in the near term and inflation expected to average ~3.5% in FY20, we continue to expect the MPC to deliver another 25 bps rate cut in the next monetary policy review in August 2019, taking the cumulative monetary easing to 100 bps in the current cycle. The road thereafter would get data-dependent with monsoon outturn, sustainability of the recent softness in global commodity prices, global trade outlook and signals from the upcoming FY20 Union Budget (to be presented on July 5).

Meanwhile, we take this opportunity to highlight that money market liquidity has turned surplus averaging a little over Rs 50,000 crore in the last one week from an average deficit of Rs 54,200 crore seen since the beginning of FY20. Prompt and calibrated infusion of primary liquidity via FX swap (Rs 35,000 crore) and OMO purchases (Rs 40,000 crore) in Q1FY20 so far has been instrumental in getting back comfort on liquidity visibility for market participants.

Further, the RBI on Friday announced that it will constitute an Internal Working Group to review comprehensively the existing liquidity management framework and suggest measures, among others. Constitution of a special panel on liquidity is a step in the right direction as it can set the framework for efficient liquidity management and also provide guidance to market participants.

The author is chief economist at Yes Bank